Index Outlook: A new high in sight

Both the Sensex and the Nifty are within striking distance of a new high. Investors should stay on the right side of the rally while watching out for sudden turbulence.

It was on the Diwali day in 2010 that the Sensex hit the high of 21,108. After Friday’s blitzkrieg, investors are wondering if it will be another memorable Muhurrat session on Dalal Street this year. But given the fact that the Sensex is currently just 324 points away from its life-time high of 21,208 and 226 points below the Diwali 2010 peak of 21,108, the move to a new high could happen well before the Diwali fireworks light up the sky.

The sense of disbelief, however, lingers that stocks are partying in an environment of slowing economic and corporate earnings growth. But as said earlier, it is best to ride the rally and not agonise over the rationality of it. But do stay vigilant to book profit on your short-term portfolio before the party ends.

Stocks were subdued in the early part of the week, as investors awaited the outcome of the US Parliamentary stalemate. But the bulls were back in business on Friday, aided by news of strong foreign investor flows in the month of October.

FIIs have purchased stocks worth $1.1 billion so far this month. This lifted the hopes that tapering of the QE will be put off indefinitely, leading to an unending gush of foreign capital in to the country, lifting stock prices higher and higher. If wishes were horses…

Economic data continues to be depressing. Wholesale price inflation for September was at a seven-month high driven by price increases in crude oil. Core inflation too accelerated last month. The rupee strengthening above the 61 mark, however, provided some cheer. The next batch of quarterly earnings will preoccupy market participants next week. They will also start prognosticating about the RBI’s next move in the monetary policy meeting scheduled for the end of this month.

Oscillators in the daily chart are positioned in the positive zone and moving higher. But it is the movement in the weekly oscillators that is more interesting. They are beginning to emerge into the positive zone. This means the index could be poised to start another leg of the medium-term uptrend.

Sensex (20,882.9)

The Sensex has not only breached the short-term target at 20,740, it has also managed a close above it. As explained last week, this alters the medium-term view for the index.

It is now possible that the up-move that began from the August low of 17,449 is now breaking into its third leg. This leg has the targets of 21,299 and 22,577. Since the first target is near the previous life-time high of 21,208, that is the level we will need to work with for the time being.

If we expand the picture and take the target of the third wave from the 15,748 low in the Sensex, we arrive at the target of 20,201 and then 21,903. In other words, the entire zone between 20,000 and 21,200 is a strong resistance zone where investors need to tread cautiously. Once this zone is surpassed, a rally of 6 to 8 per cent can be expected. For the week ahead, investors can continue to buy in declines as long as the index trades above 20,312. Subsequent supports are at 20,119 and 19,925. Short-term resistances are at 21,108 and 21,207.

Nifty (6,189.3)

The Nifty managed to close well above its previous peak of 6,142 last week, paving the way for the rally towards 6,229.4. It now appears that the third leg of the rally from the 5,119 low is currently in motion.

This wave has the targets of 6,332 and then 6,723. Since the first target occurs at the index’ life-time high of 6,338, we should expect some hiccups around that level.

But if the index manages a move above that level, next targets would be 6,461 and then 6,723.

There could be some turbulence next week as the index approaches the 6,230 peak. Immediate supports are at 6,016, 5,958 and 5,900.

Traders can buy in declines as long as the index trades above 6,016. The short-term trend will be threatened only on a close below Rs 5,900.

Immediate upward targets for the index are placed at 6,229 and 6,338.

Global cues

Global markets were merry in the second part of the week with the staving-off of the US debt ceiling issue. The S&P 500 rose to a new high and stocks on the Nasdaq too rallied strongly behind Google, that crossed the $1,000-mark on Friday.

Many benchmarks went on to record multi-year highs.

European indices such as the CAC and Belgium’s BEL20 reached levels last recorded in 2008, while the DAX hit a new life-time high.

The Dow put up a rather muted show amidst all this cheer, gaining just 162 points.

It is currently hovering just above the key resistance level indicated last week, at 15,334.

We stay with the view that the strong move away from this level can take the index to 15,709. Short-term supports for the index are placed at 15,150 and 15,000.

The dollar index did not seem too enthused by the debt deal agreement. It declined one per cent more for the week to end at 79.7.

Key medium-term trend decider is 79 and break of this level will mean continued weakness in the green-back.

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